News Analysis: In or out, firms keep the FTSE 100 in perspective - Press reports make much of 'old economy' firms being displaced from the FTSE 100 by newer companies. How true a reflection of company value is this?

Although news bulletins are at pains to explain just how the FTSE

100 is doing, financial PR and investor relations (IR) practitioners are

divided over the influence of the FTSE 100 in a global economy, despite

the apparent resurgence of telecom, media and technology (TMT)

stocks.



'Old' blue-chip companies such as Hanson, the aeroengine-maker Rolls

Royce and British Steel successor company Corus, last week dropped out

of the FTSE 100 along with Associated British Foods and brewing and

leisure group Scottish and Newcastle. Those coming in were internet

security firm Baltimore Technologies, IT products and services company

Dimension Data, electronic equipment distributor Electrocomponents,

telecoms equipment engineer Spirent and Granada Media.



The FTSE International committee, which compiles the indices, meets

every quarter to adjudicate on the companies joining and leaving the

index.



Its decision is based on ranking companies by market value using the

previous day's closing prices.



As decisions are made on a quarterly basis, companies can move in and

out of the FTSE 100 regularly. Scottish and Newcastle, Hanson and ABF

were ejected in March when the index saw its biggest ever shake-up

following the rise of hi-tech stocks. They were re-admitted in June,

following a downturn in the new economy, triggered by fears of an

interest rate rise and a fall in the Microsoft share price.



Perhaps surprisingly, most financial PROs claim that being in or out of

the FTSE 100 has little effect on a company's reputation as there are so

many factors involved. What is important is the market and - profit

warnings aside - financial PROs aren't claiming they have mastered the

art of controlling share prices.



'A lot depends on how the companies react to falling out - it can be

compared to being relegated from the Premiership. Some companies are

relegated and never heard of again,' says GCI Financial MD Alex Mackey

'Because they are judged purely in terms of share price no amount of

corporate activity will change it,' he says.



'When a company drops out, its fall is often accompanied by a lot of

adverse publicity and in that situation you have to apply 'first aid

PR'. The press will look for a reason why the company has fallen out and

will make an educated guess,' he adds.



'Companies don't have any control over it, as it is just down to share

price. It is a noticeable cosmetic event, but companies can drop out

through no fault of their own. They could be doing very well but then

two companies outside the FTSE 100 could merge and knock them out,' says

William Clutterbuck, a consultant at the Maitland Consultancy.



'The fact old economy blue-chips are being pushed out in favour of

e-businesses yet to make a profit, indicates that being in or out of the

FTSE 100 is not a true reflection of a company's communication ability

or even its true value - it is the vagaries of the market or a

particular sector,' adds Neil Mainland, the IPR's City and financial

group chairman.



Khuram Chaudhry, an equity strategist at Merrill Lynch, says the old

economy might be being pushed out now by the new economy businesses, but

the situation could easily change again by the next quarter.



He says that if you look at new economy companies based on fundamentals

- profits delivery, earnings forecast growth and margins - you have to

question whether they deserve to be in there.



Such volatility, especially in the current market climate, does present

a challenge for the IR practitioner. One of the downsides of dropping

out of the FTSE 100, is that relegated companies could slip further as

funds tracking the FTSE 100 sell the stock, pushing the share price down

even more. It can be a self-fulfilling prophecy.



This is one issue which affects communications as index-trackers

sell-up, according to Mainland. 'Companies have to have an adequate IR

strategy if they fall out to explain that it may be for no other reason

than sector movements or market feeling.



'Most companies now know they have to communicate with fund managers as

institutional shareholder behaviour is more volatile and moves more

quickly,' he adds.



Clutterbuck, although agreeing that good IR is vital, claims that

falling out of the FTSE 100 is not necessarily disastrous for the share

price as few funds track only the leading index.



'The FTSE 100 is less crucial than it was in the 1980s because it is

used less. Trackers use the 350 or all-share index and fund managers do

pan-European or global research,' he says.



'When a company is about to drop out they have to take particular notice

of their IR, but companies that are about to go in have to be careful

not to try to capitalise on it or crow as it can be a very short-term

thing.'



Most financial PR practitioners agree that these days the FTSE 100 is a

roller-coaster and whether in or out, most companies manage to keep it

in perspective.



Clutterbuck sums it up: 'If you go in at 97 you have to continue to grow

at the same rate as the FTSE or you are considered to be on the way out

next time. If you are at 103 you are considered to be on your way in.'



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